7.17 pm

The Minister for Energy and Competitiveness in Europe (Mr. Peter Hain):
It is a pleasure to appear before you, Madam Deputy Speaker, as you are a Welsh Deputy Speaker and your distinction is increased by the fact that your husband comes from the Neath valley in my constituency.

I congratulate my hon. Friend the Member for Chatham and Aylesford (Mr. Shaw) on securing a debate on this important topic. I acknowledge his expertise and the energy that he puts into representing his constituency interests and the concerns of industries throughout the country, for which he has eloquently spoken. I valued the meeting that he initiated on behalf of the energy-intensive users group. Following that meeting, I received from the Confederation of European Paper Industries a well-argued submission that I have studied carefully.

I am all too aware that many important industries are paying substantially more for gas than they did this time last year, and that that has potentially serious consequences for competitiveness. I welcome this opportunity to state clearly the major causes of the price rise and the action that the Government are taking to address the problem.

An important cause of the doubling in wholesale gas prices has been arbitrage across the interconnector with high oil-related gas prices in Europe. The lack of liberalisation and competition in Europe and the consequent lack of competition among different gas companies meant that when oil prices went up, European gas prices did also, and British prices followed.

When the interconnector was commissioned in 1998, it did not have a significant upward pressure on prices because oil-related gas prices in Europe were very low at that time. However, as oil prices increased, so did continental gas prices. Trade and the opportunity for trade across the interconnector have caused the British price to rise as well. We have experienced not only physical interconnection, but economic and price interconnection.

Prices have also been affected by the tightening of gas supply and demand as gas has been exported to Europe. The difference in price between the UK and the continent

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during 2000 meant that exportation was very attractive and record levels of gas went across the interconnector. Gas demand was 20 per cent. higher on some days last year than it was in 1999. This winter there has also been upward pressure on prices because of slightly lower North sea production than was planned, owing mainly to breakdowns. Imports through the interconnector since October have often helped to meet demand as European prices have been passed straight through.

The situation is serious, and my hon. Friend was right to spell it out, but the Government have been active right across the gas market--from offshore production to the wider European market--in addressing the problems. I shall briefly outline our proposed three-point strategy before discussing the individual parts in more detail.

The key is to increase liberalisation and competition in Europe. The Government want the Stockholm summit in June to drive forward full liberalisation and reform of the gas market in Europe. We are also taking every opportunity to raise the need for liberalisation with our opposite numbers in other member states. This will, of course, not be achieved overnight, but it is at the heart of the problem and must be tackled.

We are looking at ways of improving the functioning of all parts of the market. That involves increasing the amount of information available to the market, both across the onshore-offshore interface and from the interconnector, to achieve full transparency. A well- informed market is an efficient market. Such action will help the market to work more effectively by, for example, enabling it to prepare when it sees that there are planned maintenance outages in the North sea.

We are also acting against potential anti-competitive behaviour, a phenomenon to which my hon. Friend drew attention. The operation of the interconnector has been giving cause for concern for some time, and my right hon. Friend the Secretary of State therefore wrote to Commissioner Monti requesting a Commission inquiry. The Commission has now indicated that it will look into the matter. We want the report that he will deliver to be finalised as swiftly as possible. This demonstrates that we shall not hesitate to refer any evidence of any kind of anti-competitive behaviour to the appropriate competition authorities.

It is vital for the interconnector to work in a transparent and efficient manner. Therefore, in a separate but related exercise, we are working with the interconnector shippers to establish whether more information can be made available to the market. We believe that that will produce a tangible improvement in the market. I know that some have suggested simply closing down the interconnector as a solution to all our problems, but that is not practical: closing it down would put us in breach of our European Union and wider international obligations, as well as exposing the Government to the possibility of civil action from interconnector shippers for many millions of pounds.

Moreover, the interconnector has a crucial function in regard to security of supply. Our forecasts suggest that Britain will be a net importer of gas by 2005, although there are indications that that may happen earlier. When the time comes, we shall rely heavily on interconnector imports; meanwhile we already need to draw on supplies imported through the interconnector from time to time.

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For example, this winter we imported for nearly two months--from November to January--and we are currently importing again.

Following our agreement at the Lisbon European Council meeting last year to speed up liberalisation across the European Union, the Commission will shortly propose a directive to bring about a properly competitive single energy market. We welcome that, and the Commission has the Government's full support in pressing ahead with the Lisbon-Stockholm process, leading to early full gas market liberalisation. The Government also welcome the measures that the Commission has been taking from time to time to challenge restrictive provisions relating to the supply of gas to the EU from other areas and other states, including Norway and Algeria. Progress in that respect is essential if we are to achieve the full "gas-to-gas" competition towards which we are all working.

As well as ensuring that the European market works, we need to ensure that the British market works and is seen to work, and is seen as being fully transparent. We have therefore been working with offshore companies and interconnector shippers to see what scope there is for making more information available. I am encouraged by the co-operative spirit that we have seen so far, and believe that it may result in a tangible benefit to all players in the market.

We will act forcefully against anti-competitive practices, which were mentioned by my hon. Friend. If there is evidence of anti-competitive behaviour, the Director General of Fair Trading, John Vickers, has strong powers to act, and should he find evidence of any anti-competitive behaviour prohibited by the Competition Act 1998, he will act promptly.

We acknowledge that recent higher gas prices add to the burdens on businesses, and we take seriously their concerns on the matter. However, the climate change levy is being introduced as part of our response to the real, long-term threats posed by global warming.

The recent upward movement in gas prices reflects short-term fluctuations in the markets, but the climate change levy is intended to produce significant carbon savings, up to and during the Kyoto target period of 2008 to 2012. That mechanism will stay in place, and we are working with industry--particularly highly intensive users of energy--to minimise the impact of the levy on them. The Chancellor has introduced an approach that will achieve that.

As part of the climate change challenge, the Government are serious about their target of achieving at least 10,000 MW of combined heat and power capacity by 2010. That will make an important contribution to meeting our climate change objectives set out at Kyoto. The Government will be consulting on a draft strategy shortly, setting out measures already announced, and other new ones that will help to achieve that target.

High gas prices may have had an impact on investment in combined heat and power. By affecting the relative price of gas and electricity, they may make CHP less attractive in the short term. However, our commitment to CHP is long term, and high fossil fuel prices tend to sharpen commercial incentives to use those fuels as efficiently as possible. Recently, I had a meeting as a result of representations by my hon. Friend the Member for Slough (Fiona Mactaggart), because CHP forms an important part of the electricity market in Slough, and we

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want to safeguard its interests. We are working with the entire industry to advance its opportunities and protect it against uncompetitive attack.

The paper and board industry occupies an important place in the UK economy, and my hon. Friend the Member for Chatham and Aylesford drew our attention to that most appropriately. The industry has some 20,000 employees in about 90 mills spread all over the country and contributes more than £4 billion in gross value added to our GDP. Despite that enormous contribution and large turnover, the profit margins of the industry are very small--minute, in fact. I was given a figure of about £150 million by the delegation from the paper industry that my hon. Friend brought to see me.

The industry has already spent an extra £50 million as a result of this enormous explosion in prices in the gas market. That represents a big squeeze on profits, and it is unsustainable. I recognise that, and we want to work closely in partnership with the industry to ensure that it will not be affected in too dramatic a fashion as a result of that squeeze.

Although the industry faces competitive challenges in a global marketplace and employment is contracting, output has continued to increase and productivity has been increasing substantially, much to its credit. Nevertheless, I recognise that the industry faces a number of economic

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challenges to ensure its future strength. We want to put in place an action plan with the industry to overcome those challenges, and I hope that my hon. Friend and others will work with us to achieve that.

In summary, I agree with my hon. Friend about the seriousness of the matter. The Government recognise the damage caused by the artificial behaviour in the gas markets, which is difficult to explain. We have identified the principal causes and are well on the way to providing solutions. I want to work with the gas industry, the associated oil industry and those who have to pay the increasingly high prices, to tackle the problem as quickly as possible.

I call on our colleagues in the European Union to work with us because an uncompetitive gas market does not benefit Britain and is also damaging to Europe's long-term future. We are suffering although we are innocent. We have put our house in order and reduced gas prices, but are suffering from artificially induced pressure on gas prices.

I thank my hon. Friend for bringing the matter to the attention of the House and for the opportunity to set out the Government's action programme, which is clear and dynamic and shows that we are committed to solving the problem. We will leave no stone unturned.